The Hutchins Roundup brings the latest thinking in fiscal and monetary policy to your inbox. Have something you'd like us to include in the next Roundup? Email us and we'll take a look.
This edition was written by Sarah Ahmad, Alex Conner, Tristan Loa, and Louise Sheiner.
New business startups play a pivotal role in job creation and productivity growth in the U.S. economy. Jose Asturias of the U.S. Census Bureau and co-authors show that trends in monthly business applications from the Bureau’s Business Formation Statistics correlate with aggregate economic trends. They find that the number of business applications, especially from entities with a high probability of hiring employees, predicts changes in nonfarm employment and other key economic metrics. Compared to other commonly used statistics, the data series for likely employers ranks second to the new single-family homes sold series in its ability to forecast nonfarm employment growth, with a substantial 11-month lead and correlation of 0.64. Incorporating the likely employer series improves the predictive value of a model that forecasts nonfarm employment growth over a 12-month period, reducing the forecast error by 8%.
Daniel A. Dias of the Federal Reserve Board, Christine Richmond of the International Monetary Fund (IMF), and Grant Westfahl of Berger Consulting Group find that the duration of a country’s exclusion from international capital markets following a sovereign default varies significantly across countries. Low-income countries experience significantly longer exclusions from international capital markets after defaulting than middle-income countries. Furthermore, countries with stronger democratic institutions tend to regain market access faster as do countries that default after a natural disaster. Larger investor losses prolong a country's exclusion from international capital markets. Participation in IMF programs does not necessarily speed up market re-entry, but it does not hinder it. Exclusion periods have shortened over time, particularly after 2000, likely due to increased investor risk appetite because of the low-interest rate environments in advanced countries.
Hassan Afrouzi of Columbia and co-authors contend that the “hot labor market” theory of post-pandemic inflation – mostly driven by the historically high vacancy-to-unemployment ratio from 2021 to 2023 – could have the causality backward: inflation might drive vacancies. A few mechanisms generate this result. First, a burst of inflation erodes real wages, to which workers respond by bargaining for better pay, switching jobs, or simply quitting. The vacancies created by this churn are costly and time consuming to fill, so overall vacancies rise for a time after the inflation shock. This mechanism by itself implies a rising unemployment rate, which is the opposite of recent experience. The second mechanism is a decline in the layoff rate as firms benefit from charging higher prices while holding on to workers whose wages have not adjusted. This reduces the unemployment rate, and the effect is stronger than the initial wave of quits. Taken together, these forces explain the aggregate post-pandemic labor market data: vacancies and job-to-job switching rose, layoffs and unemployment fell, and real wages adjusted only gradually. The authors use their model to show that other labor market shocks, like a positive productivity shock or an unexpected increase in the generosity of unemployment insurance, cannot explain post-pandemic labor market dynamics.
"Q: One not so great aspect of the legacy you and President Biden leave behind is a very large budget deficit – roughly 6% of GDP. Are you sorry you couldn’t make more progress on that? And how much of a risk does that pose to the economy?"
"A: I am concerned about fiscal sustainability, and I am sorry that we haven’t made more progress. I believe that the deficit needs to be brought down, especially now that we’re in an environment of higher interest rates. For example, over the last year, the interest cost of the debt has increased by several hundred billion. It’s one of the largest items responsible for the increase in the budget deficit. And we do need to bring it down. The primary deficit excluding interest is now a little over 3% and I believe it needs to come down," says Treasury Secretary Janet Yellen (video).
"...There will be important negotiations over what happens with expiring tax provisions. If everything is kept in place and they’re not allowed to expire – we just keep [TCJA] as it is today – CBO has estimated that the cost of that is 5 trillion dollars. So, I believe it’s important. I hope that Congress in considering this will look for ways to pay for whatever they do extend to avoid that explosion of our deficit from a starting point where the deficit is already too high."
